Foreclosure scandal impact: Sales dry up

By Les Christie, staff writerNovember 29, 2010: 5:12 AM ET

NEW YORK (CNNMoney.com) -- Big banks are having trouble restarting the foreclosure process after this fall's "robo-signing" scandal, and the once booming market for foreclosed homes has been hit hard as a result.

According to ForeclosureRadar, the number of properties coming to auction in hard-hit western states -- Arizona, California and Nevada -- has dropped more than 30%.

In San Diego, according to broker Scott Cheng of Cheng Realty, who puts investors together with foreclosed properties, the number of auctions scheduled has fallen from 500 a day, to 300. "That part of my business has dried up," Cheng said. "A lot of my investors have stopped looking."

Cheng used to be able to find about three or four suitable homes a month for investors looking for a bargain. Now, he hasn't done one of these deals since August.

"The ones who are really upset are the investors, who buy on the courthouse steps," said Kevin Berman, a broker with Bankers Realty Services in Fort Lauderdale, Fla. "There used to be sometimes 700 sales a day. Now there are like, seven."

In September, several banks -- including Ally, Bank of America, and JPMorgan Chase -- acknowledged problems with their foreclosure procedures. Employees had been signing as many as several hundred documents a day in which they sometimes attested to facts that they had no personal knowledge of, calling into question the legitimacy of the foreclosures. (See "I was a Robo-signer")

The banks initiated foreclosure moratoriums, promised a full review of all cases, and to resume foreclosures quickly. But the review process has been slow-going.

Investors had been doing brisk business, buying distressed properties on the cheap, sprucing them up and flipping them. But now they are being far more cautious.

"Their concern is that homeowners will be more aggressive in fighting foreclosures even after the auction sale," said Sean O'Toole, CEO of ForeclosureRadar.

For vulture investors, speed is essential -- they do not want to tie up investments for months while attorneys argue.

They are also worried about being able to unload the property. Berman represented one investor who had purchased at auction, fixed the home up and went to contract with a buyer, who then backed out of the $240,000 deal. "His attorney told him he could find out the foreclosure wasn't done right," said Berman.

Pressure on the market for distressed properties could last if delinquent borrowers are less likely to give up on their homes, according to Duane LeGate, CEO of Georgia-based House Buyer Network.

Troubled borrowers go to LeGate for help selling their homes in short sales, in which they sell for less than the price of their mortgage. LeGate says his business dropped more than 30% the week after news of the robo-signing scandal broke, and has stayed down since. His theory: homeowners think the bank will have a tough time kicking them out in this environment, and that they can live for free for a while. He says he's got two friends who intend to do just that.

"After that, they'll just take their medicine," said LeGate. In the meantime, they can pay off other debts and build up nest-eggs.

O'Toole believes the legal issues involved in robo-signing will ultimately be settled in favor of the banks.

"The fear that has been created in based more in hype than in law," he said.

Whether the hype is to blame or not, the last thing the weak housing market needed was to shake the confidence of already nervous consumers.

In Buffalo, New York, the city is selling vacant homes for a $1 to those who are willing to fix them up and live in them for a few years. But as many buyers soon find out, the cost to renovate these super cheap properties can quickly add up. More